Today’s news: Marathon Petroleum (MPC) will consider a corporate breakup; MPC raised from Buy to Strong Buy.
Yesterday, investment manager Elliott Management Corp. sent a letter to Marathon Petroleum (MPC), the nation’s largest energy refiner, seeking changes that could potentially increase the MPC share price. Elliott owns 4% of MPC shares. (When a person or entity that owns a large amount of shares makes a request to change corporate policy, that person/entity is known as an “activist investor.”)
The letter stated, in part:
we believe Marathon is severely undervalued and that there are readily available steps by which the Board can unlock $14 – $19 billion in value for shareholders (yielding a ~60 – 80+% increase to today’s stock price).
Elliott’s major point is that Marathon should divide into three companies: Speedway (over 11,000 retail stores), refining operations and midstream holdings. The theory is that the three stocks would trade at a cumulatively-higher share price than MPC’s current price. Hedge fund D.E. Shaw owns a similar stake in MPC and reportedly supports Elliott’s pursuit of a corporate breakup.
Marathon responded in a cordial manner, including this statement:
We will thoroughly evaluate Elliott’s proposal and look forward to continuing our constructive engagement around these issues.
Marathon closed on the purchase of Andeavor (ANDV) in October 2018, and subsequently merged the two companies’ midstream operations in 2019.
As for valuation, Marathon is expected to deliver EPS of $7.35 in 2019. The current P/E remains very low at 8.2. The annual dividend payout is $2.12, and the current yield is 3.5%.
The market was pleased with Elliott’s proposal, sending MPC shares up $4.67 yesterday, or 8.4%, to $60.15 on almost triple the average daily trading volume. The stock has medium-term price resistance at 65. I think it’s credible that we could see MPC trade at 65 in the coming days. If any additional positive news emerges that indicates Marathon management is seriously considering Elliott’s proposal, then MPC could certainly trade even higher.
Therefore, I’m raising my recommendation on MPC from Buy to Strong Buy. There’s a significant capital gain opportunity if Elliott Management gets their foot in the door with Marathon’s Board of Directors. Marathon has just completed two major M&A actions, and could theoretically turn their focus to additional changes to corporate structure, with the support of two very large shareholders.
Even if Elliott’s proposal falls flat, Marathon remains a severely undervalued company with rapidly-growing earnings, and the stock additionally offers an attractive dividend yield. You’re probably aware that if Marathon publicly rejects Elliott’s proposal, the share price will immediately pull back. I would expect that pullback to be relatively temporary, and I would consider that moment to be a buying opportunity. I anticipate capital gains throughout the refining industry as the market turns its attention to IMO 2020 in the coming months. Buy MPC now and buy more on pullbacks. Strong Buy.